Thursday, January 28, 2010

A friend emails me a list of commissions dealing with Social Security, entitlement reform and other issues, along with links to their reports. This is a very helpful reference for what's come before.

It's unclear what will happen with President Obama's plan to commission a commission on his own rather than rely on stalled Congressional legislation. While I'm generally favorable toward a commission approach, all other options seeming exhausted, it's not clear what chance a presidentially-appointed commission has when Congress has just refused to appoint one itself.

The 21st Century Retirement Security Plan: The National Commission on Retirement Policy Final Report, Center for Strategic and International Studies,(Gregg-Breaux / Kolbe-Stenholm Commission), 1998-1999

Tuesday, January 26, 2010

In a New York Times op-ed, Sens. Charles Schumer (D-NY) and Orin Hatch (R-UT) propose a short term cut in Social Security payroll taxes to help stimulate employment:

Here's the idea: Starting immediately after enactment, any private-sector employer that hires a worker who had been unemployed for at least 60 days will not have to pay its 6.2 percent Social Security payroll tax on that employee for the duration of 2010. The Social Security trust fund will then be made whole with spending cuts elsewhere in the budget between now and 2015. That's it. Simple to understand, and easy to explain.

The beauty of this proposal goes beyond its simplicity. Unlike a jobs tax credit of a specific dollar amount, this credit is "front-loaded" in that it provides an incentive for businesses to hire workers earlier in the year — because the tax benefit will be greater. A $60,000 worker hired on Feb. 1 will save a business about $3,400 in taxes, while that same worker hired on May 1 will save it about $2,500.

This isn't something I'd exactly oppose, but I'm skeptical of how much it would really do. Schumer and Hatch are smart to make the tax cut contingent on the hiring date – the earlier you hire someone the larger the tax cut – but since the cut remains a constant percentage of pay I'm not sure the effects here will be that large.

More broadly, hiring an employee is a long-term investment: there's a significant period of training before most employees really become productive, and I'm not sure that a short-term tax cut is enough to make employers respond. In general, permanent changes to taxes or other policies are more effective than short-term, "targeted" fixes.

Government can't effectively micromanage the economy; what it can do is create an environment in which business can thrive. While the Schumer-Hatch proposal wouldn't make matters worse, policymakers should think hard about what the best environment for employers is in terms of taxes, regulations, trade and the rest and enact policies to improve conditions for the long term.

The Cato Institute's Mike Tanner—my former boss and a great guy—writes in the Washington Times that now may be the time to revive Social Security reform. Social Security's financial problems have worsened over the past year due to the recession. And, perhaps more importantly, the apparent healthcare overhaul—and its always-dubious promise of fixing the budget by lowering health costs—means that policy makers must look elsewhere for budget savings. Social Security has to be addressed sooner or later, and with healthcare on the back burner, now is as good a time as any.

But it's also worth revisiting what made Social Security reform so hard the last time it was tried in 2005. Tanner writes:

If Social Security's problems haven't changed since the Bush years, neither have the possible ways to fix those problems: Raise taxes (the Social Security payroll tax would have to be nearly doubled to keep the program afloat), cut benefits by as much as 25 percent or allow younger workers to invest privately.

Here's where I differ a bit with my more libertarian brethren.

Back when I was on the staff of President Bush's 2001 Social Security reform commission, we wrote in our interim report that once Social Security begins to run cash deficits in 2016 we face the ugly choices to "raise taxes, reduce benefits, decrease other government spending, or increase borrowing from the public."

Wise guy that I was—a habit that I assure you I've given up—I remarked to one of the other staffers that with personal accounts we face the same choices, only sooner. That is, when you divert payroll taxes that currently fund today's benefits to private investments, you've got to find money to fill that gap. Funding these so-called "transition costs" involves the same choices as before: raise taxes, cut spending, reduce benefits, or borrow.

And this is one place where reform fell down in 2005. No one was willing to raise taxes or cut spending, and President Bush's plan already would have reduced benefits just to fix the program's solvency. As a result, the accounts would be funded entirely by borrowing. This all but eliminates the economic case for accounts, which relied on increased national saving to boost the economy's ability to support larger populations of retirees with smaller populations of workers. Funding accounts with debt is like borrowing from your 401(k) to invest in your IRA—total saving doesn't change.

Politically speaking, the debt associated with these transition costs was a loser. It was hard to convince the public you were taking the fiscally responsible route—which, overall, President Bush was—when the plan involved a few trillion in new borrowing.

I'm not sure how a Social Security reform plan today addresses these problems any better than plans in 2005 did, which is why I'm skeptical of the success of accounts funded out of the payroll tax. I support them, but unless people are willing to make tougher choices than they've shown themselves to be, I don't see how it happens.

But when Social Security reform does come up, personal accounts still have a role to play. The Left will favor fixing Social Security the way we've generally fixed it in the past, by raising taxes. But if we need more money to fund Social Security benefits—which isn't illogical, given that people are living longer—then people should have the option to save those extra contributions in their own accounts rather than paying to a system that may or may not save them in the "trust fund" and may or may not pay them back in the future. That's a place where personal accounts have a real role to play, and an argument that account supporters can win.

Thursday, January 21, 2010

As the Washington Postreports, the Obama administration is set to sign an executive order establishing a bipartisan commission to look at ways to reduce the budget deficit. Both Keith Hennessey on the right and Paul Krugman on the left are skeptical.

Hennessey does a terrific side-by-side of the Obama administration's plan for a commission versus the Conrad-Gregg commission proposal. One of Keith's strongest points is with regard to the goals of the relative commissions: most commission proposals have focused on the long run, in particular the growth of entitlements. While the Obama commission would be able to make recommendations in these areas, their specific goal is to reduce the deficit to 3 percent of GDP by 2015. Not only does that tend to ignore the longer-run problems, it seems to me that the short run deficit really is the business of Congress. I'm fine on a fast track procedure by which a commission can recommend longer-term reforms, but if we also need a commission to balance the budget year-in and year-out then we might as well send Congress home.

Krugman argues that the Greenspan Commission that led to the 1983 Social Security reforms was just a ruse to raise taxes on working people to fund tax cuts for the rich. I'm not sure how well that really holds up, since it's pretty clear that the Greenspan Commission didn't know that its proposal would lead to short term surpluses, and if it didn't, it's hard to argue that it intended to use those short-term surpluses to offset deficits driven by tax cuts elsewhere. In any case, I somehow suspect that's not how an Obama commission would end up. If anything, there's a reasonable fear of the contrary: that it would push to increase taxes in ways that Democrats alone would like to do but politically couldn't accomplish.

Wednesday, January 20, 2010

The Center for Retirement Research at Boston College has released a new issue brief titled "Pension Obligation Bonds: Financial Crisis Exposes Risks" by Alicia H. Munnell, Thad Calabrese, Ashby Monk, and Jean-Pierre Aubry. The paper is well worth reading as pension obligation bonds are becoming a more popular – but more risky – means of financing public employee pension plans.

My quick take: A pension obligation bond is issued by a state or local government and explicitly backed by that government. The proceeds of the bond sale are deposited into the government's public sector pension fund as a means to reduce the amount that the government must directly contribute to the pension. The driver behind the sale of pension obligation bonds is a difference in assumed interest rates between the bonds themselves and the assets the proceeds of the bonds are invested in.

State government bonds generally pay low interest while public pension accounting practices assume that pension assets will earn high returns by being invested in stocks. As a result, pension obligations bonds reduce the government's measured liabilities – that is, due to the assumed interest rate difference, these bonds reduce the unfunded pension liability by more than they increase the government's explicit debt liability. This makes pension obligations bonds appear to be an arbitrage opportunity for state and local governments.

Of course, this is all an accounting gimmick: we can't simply assume that pension investments will earn higher returns without risk and there is a good chance that realized fund returns will be lower than the interest rate the government pays on pension obligation bonds. In reality, pension obligation bonds are simply state and local governments doubling down on their pension liabilities – taking more risk in hoping that the gamble pays off. If it does, that's great. If it doesn't, though, already massive public sector pension deficits will only get larger.

Anyway, that's my take. You can read the whole CRR issue brief here (they're a little less skeptical of PBOs than I am).

U.S. News & World Report's Philip Moeller reports on potential benefit changes that could improve treatment for low earners under Social Security, discussed in a recent GAO report. Here's the short list with some of my comments on each – you'll have to read the article for the details (which are good).

Guaranteeing a Minimum Benefit.

Most benefit guarantees, for instance, don't do a heck of a lot because not many people are eligible. The problem for an earnings-based system like Social Security is that as you move to ensure a minimum income for truly low earners you end up shifting much closer to a "welfare program" that breaks the earnings-benefit link. That already occurs to some degree already through Social Security's progressivity, but to reach the truly poor in retirement you have to target people with very spotty work records. That's a tricky path, both in policy and political terms.

Reducing Work Requirements for Eligibility.

I wrote on this subject for NASI last year and was a bit disappointed in the results. There aren't a ton of non-immigrants who benefit from reducing the current 10-year work requirement to qualify for retirement benefits. I'm all for lowering the work requirement, since this doesn't result in any sort of giveaway since Social Security doesn't really have a minimum benefit, but I don't think it will produce all that much.

Supplementing Benefits for Low-income Single Workers.

I'd rather reduce spousal benefits, which are an unearned (and often unneeded) subsidy for married couples, then use the savings to boost benefits overall at the low end. We need less complexity rather than more.

Adopting Earnings Sharing.

I'm very interested in this idea, in which total household earnings would be split evenly between spouses each year for the purposes of calculating their future benefits. I've not seen it modeled very closely, so there may be some things that I haven't thought about, but in the big picture the household is the relevant unit so I think that's what we should be looking at.

Reducing the Marriage Duration Required for Spousal Benefits.

I ran some numbers a few years ago on lowering the current 10-year marriage requirement to be eligible for divorced spouse benefits and it seemed like a cheap but pretty well targeted reform; that is, it increased benefits principally for people with very low lifetime earnings. Since the typical divorce takes place before 10 years of marriage this might make sense, although I'd probably prefer something like earnings sharing.

Providing Caregiver Credits.

I've read differing accounts of how well caregiver credits would work; one problem is that low-income people have to work and can't afford to stay home, so the targeting may not be great unless it's limited to low earners. It would also weaken the earnings-benefits link, although it's often pretty weak in any case.

Increasing Survivor Benefits.

When one spouse dies total household Social Security benefits are reduced by one-third to one-half, depending on the distribution of benefits between spouses. Using a standard approach for calculating efficiencies of scale in household size, a household of one has costs equal to around 63% of a household of two. A benefit reduction of one-third may be ok, but one-half seems too much.

Providing Longevity Insurance.

Social Security already provides significant longevity insurance, particularly for low earners who derive most of their retirement income from the program, but higher earners may desire more. Increasing benefits later in life might help compensate for the fact that most non-Social Security sources of income aren't indexed to inflation and thereby help smooth income better over the course of retirement.

I'm ok on pretty much all of these, at least in some form, although some would work better than others.

Tuesday, January 19, 2010

The New York Times runs an interesting story that probably won't be news to people who've really followed the history of Social Security reform (all five of us…) but should be worthwhile reading for those who haven't. Advocates of a bipartisan commission approach to entitlement reform sometimes point to the Greenspan Commission of the 1980s, which led the way to the Social Security Amendments of 1983 that kept the program solvent and instituted a number of longer term reforms.

The problem, as the Times points out, is that the Greenspan Commission itself couldn't come to an agreement on reform and it finally took back-channel negotiations between the Reagan Administration and Members of Congress – albeit, Members who did serve on the Commission – to come to a final package. The lesson is that we shouldn't assume that a bipartisan commission is an easy or sure road to agreement on entitlement reforms. I certainly agree with that.

I'm not sure, though, that this means we shouldn't go the commission route. Even if a commission isn't guarantee to produce reform – even, in fact, if a commission isn't even likely to produce reform – it may still be a better option than others available to us. The health care reform debate, which started with a focus on cost containment and ended with increased spending and payoffs to interest groups, makes me very skeptical that Congress's regular order can now turn around and figure out a way to cut costs for Social Security and Medicare. I'm not saying it's impossible, but call me skeptical.

Moreover, even if the Greenspan Commission didn't itself produce the 1983 reforms, it may have narrowed and illuminated the policy choices such that the final negotiations between the real political players were somewhat easier. I can't say for a fact that this was the case, but it seems plausible that the commission process may have moved things along and indirectly contributed to the outcome. When all sides appoint members to a commission they've committed themselves to success; even if the commission itself doesn't succeed, that may provide an impetus to off-line negotiations. Time will tell.

Thursday, January 14, 2010

The SSA's Office of the Chief Actuary released a new analysis of four reform proposals put forward by the National Research Council and the National Academy of Public Administration's working group on "Choosing the Nation's Fiscal Future." The proposals are intended as illustrative of ways in which tax increases and benefit reductions may be combined to put Social Security's finances back on a sustainable track. The proposals include:

Proposal: Option 1, Reductions in the Growth of Benefits Only - Reforms the program by only decreasing scheduled benefits.

Tuesday, January 12, 2010

The Government Accountability Office released a new study titled "Social Security: Options to Protect Benefits for Vulnerable Groups When Addressing Program Solvency." Here's the summary:

For over 70 years, Social Security has been the foundation of retirement income for American workers and their families and has been instrumental in reducing poverty among the elderly. The Congressional Research Service estimates that if Social Security benefits did not exist, an estimated 44 percent of all elderly people would be poor today. Still, some people who receive Social Security retirement benefits remain vulnerable to poverty in old age. The elderly poverty rate in 2007 was 9.7 percent. In addition, the long-term financing shortfall currently facing the Social Security program is growing and has made reform of the program a priority for policy makers. Thus, the nation faces the challenge of improving long-term program solvency, while also ensuring benefit adequacy for economically vulnerable beneficiaries. Many Social Security reform proposals have suggested modifying the system to restore its financial balance by reducing benefits or increasing payroll or other taxes, and several also include options to address concerns about benefit adequacy for economically vulnerable groups of beneficiaries. Economically vulnerable beneficiaries generally have limited income from other sources, such as employer-sponsored pension plans or personal savings, and therefore depend heavily on their Social Security benefits. Because they have limited resources, many of those beneficiaries also receive assistance from other programs for low-income individuals, including Supplemental Security Income (SSI); Medicaid; and the Supplemental Nutrition Assistance Program (SNAP), formerly known as the Food Stamp Program; among others. This report addresses the following key questions: (1) What are the options for modifying Social Security benefits to address concerns about benefit adequacy and retirement income security for economically vulnerable groups?; and (2) What effects could these options have on benefits those groups receive from SSI, Medicaid, and SNAP?

Various Social Security reform proposals include options intended to address concerns about benefit adequacy for vulnerable groups: (1) Guaranteeing a Minimum Benefit (2) Reducing Work Requirements for Eligibility; (3) Supplementing Benefits for Low-income Single Workers; (4) Adopting Earnings Sharing; (5) Reducing the Marriage Duration Required for Spousal Benefits; (6) Providing Caregiver Credits; (7) Increasing Survivor Benefits; and (8) Providing Longevity Insurance. Many Social Security retirement beneficiaries receive benefits from other federal programs. Nine percent of Social Security beneficiaries age 65 or older, or more than 2.7 million people, also receive SSI, Medicaid, or SNAP benefits. Increasing Social Security benefits to address concerns about adequacy for vulnerable groups of beneficiaries could result in a decline in benefits from these other programs. In fact, some beneficiaries could lose eligibility for benefits from the other programs altogether. On the other hand, some beneficiaries may not be affected because their incomes, even with increased Social Security benefits, would stay within the other programs' eligibility limits.

One gripe: the line that says "The Congressional Research Service estimates that if Social Security benefits did not exist, an estimated 44 percent of all elderly people would be poor today." When is someone going to estimate the percentage of working age people who would be lifted out of poverty if the Social Security payroll tax didn't exist? It's just as valid a point as assuming that retirement benefits are eliminated.

Beginning even before its inauguration, the Obama administration set forth what appeared to be a compelling rationale for healthcare reform. But, piece by piece, that rationale has fallen apart.

The administration began with an argument that rising individual health costs, not population aging, was the biggest factor pushing entitlement costs and the future budget deficit. Office of Management and Budget Director Peter Orszag called per-capita health costs the "real deficit threat." But as I and others showed, and as the Congressional Budget Office now agrees, demographics will be by far the biggest driver of entitlement costs over the next several decades. Even if you do manage to "bend the cost curve," it won't fix the problem, since so much of the cost is simply a combination of more retirees and fewer workers.

Next, the administration focused on a number of "game changers" they claimed could dramatically reduce health spending. These included preventive care, health information technology, management of chronic diseases such as diabetes, and so-called comparative effectiveness research (CER) that found the most cost-effective treatments.

But one by one, these game changers have been shown to be less than touted when it comes to cutting costs. While these steps may improve quality, it seems we can't bank on them saving significant money. Regarding preventive care, for instance, one survey article concluded that "although some preventive measures do save money, the vast majority reviewed in the health economics literature do not." Likewise, health professors Stephen B. Soumerai and Sumit R. Majumdar wrote in The Washington Post that while health IT "has popular support, there is little evidence that currently available computerized systems will improve care. In short, it's the wrong investment to make at this time." And in an analysis of the academic literature on disease management, the CBO said, "there is insufficient evidence to conclude that disease management programs can generally reduce overall health spending."

Now my inbox brings a new National Bureau of Economic Research working paper regarding comparative effectiveness research by Anirban Basu and Tomas J. Philipson of the University of Chicago. They find that when there is heterogeneity in the effectiveness of treatments—meaning, simply, that different treatments work better for different people—comparative effectiveness policies may hurt treatment quality and impose costs by imposing a "one size fits all" approach to medicine. If everyone reacts to treatments the same, then finding the most cost-effective treatment can save money and improve care. "In contrast," they say,

CER may increase spending and adversely impact health under plausible assumptions of how markets respond to quality information. This was particularly relevant when treatment effects are heterogeneous as product-specific coverage policies failed to account for patient-specific treatment effects. We illustrated these economic effects for antipsychotics that are among the largest drug classes of the US Medicaid program and for which CER has been conducted. We simulated that if subsidies were eliminated for atypical based CATIE trial, a loss of value at 8% of class spending would be observed.

The point isn't that comparative effectiveness research makes no sense, nor is it that the other reforms proposed above by the administration shouldn't be carried out. It's that there's been a vast exaggeration—partly by the administration, and more egregiously by activists and the opinion press—of how much costs would actually be cut. Many people came to believe that with these new game changers the health system would all but fix itself. It's become increasingly clear why these claims aren't true. What we're left with is a health bill that expands eligibility, increases government control over private-sector healthcare, and raises taxes to (partly) fund it, with only token attempts at real cost-cutting.

Friday, January 8, 2010

Over at AEI's Enterprise Blog, Adam Paul isn't entirely convinced by the National Committee to Preserve Social Security and Medicare's new video arguing against a bipartisan commission to look at entitlement spending.

As Adam points out, "unlike the healthcare proposals that have mutated to fit political convenience with little analysis, the solutions to the Social Security funding shortfall—raising the retirement age, reducing benefits, increasing taxes, or some combination—are well-known and easily evaluated. In fact, these solutions were vigorously debated in public during President Bush's attempt to reform the system. Social Security has been in the slow lane for so long that any action is going to speed things up, but that speed is far from dangerous."

This conference on the long-term fiscal crisis will bring together leading experts from a range of disciplines to assess the causes of the current crisis, the magnitude of the challenge facing the country in the next decade, and the possible responses by the federal government and the states. Four panels will discuss key issues related to the long-term fiscal crisis: the anatomy of the long-term fiscal crisis; the federal budget process and the demand for revenue; the fiscal crisis in the states; and the role of health entitlements in the fiscal crisis at all levels of government. Each panel will include presentations of two papers, a comment on those papers by a discussant, and time for audience discussion on the topic. The presentations and discussion will engage the audience that will be comprised of scholars, policy makers and members of the public.

Health EntitlementsModerator: ELIZABETH GRADDY, USC School of Policy, Planning, and Development

2:30 - 2:50 p.m.

DANA GOLDMAN, USC School of Policy, Planning and Development Population Health and Longevity as a Driver of Fiscal Imbalance

2:50 - 3:10 p.m.

JOYCE MANCHESTER, Congressional Budget Office The Long-Term Budget Outlook in the United States and the Role of Health Care Entitlements (presented by DONALD MARRON, Georgetown Public Policy Institute, Georgetown University)

Monday, January 4, 2010

I have a piece in the Sunday Washington Examiner on deficit accounting in the Senate health care bill. The short story: it can either strengthen Medicare or it can reduce the deficit, but it can't do both.

In fact, only by double-counting savings from Social Security and Medicare does the Nevada Democrat's plan reduce government borrowing. Without this dubious accounting, the Reid Senate bill increases the non-Social Security/Medicare deficit by almost $250 billion. A surprisingly frank new Congressional Budget Office analysis calls foul on this off-the-books borrowing.

Saturday, January 2, 2010

Politico reports on protests against a new partnership between the Washington Post and the Fiscal Times, a newsgroup focusing on public finance issued funded by the Peter G. Peterson Foundation.

Critics are calling on The Washington Post to stop printing news articles from The Fiscal Times, a new "independent digital news publication" funded by Peter G. Peterson, a former Wall Street financier and longtime advocate of changes to Social Security.

The Post and the new publication announced an agreement last month to jointly produce content "focusing on budget and fiscal issues," and the first article from The Fiscal Times appeared in The Post on Thursday. Headlined "Support grows for tackling nation's debt," it described growing momentum for "a special commission to make the tough decisions that will be required to dig the nation out of debt."

In a letter to The Post's ombudsman, 14 academic and public-policy experts on Social Security said the newspaper should "rescind the partnership, "reserve opinion pieces for the op-ed page, and not allow itself to be a propaganda arm for ideologues who use fiscal distress as a stalking horse to destroy social insurance."

On one hand, the letter of protest is overblown: a letter from Dean Baker, Nancy Altman, Roger Hickey and others from the left complaining of ideologues is a bit much, particularly since Fiscal Times advisory board includes former CBO director and current Urban Institute president Robert D. Reischauer. If the Urban Institute is a hotbed of ideologues looking to destroy social insurance then I think we'd better just hang it all up.

That said, the writers do have a point: Peterson and those who are funded by him don't take strong views on how to fix Social Security and Medicare, but they are forceful in arguing that entitlements are a big problem – a view on which I agree – rather than a small one. The "big versus small problem" disagreement is a pretty defining one between right and left and I'm not sure how comfortable I'd feel if the shoe were on the other foot.

The first Post article from the Fiscal Times doesn't seem to show any bias, but then again, people on the left don't notice any bias in the New York Times so I'm not sure my judgment is exactly balanced.

U.S. News & World Report's Philip Moeller has a three-part guide to how your Social Security retirement benefits are calculated. You can start reading the first part here. It's a very good piece of work, with far more detail on the actual benefit calculation than any other article I've ever seen. Moeller's done a good job here.

That said, I'd pretty much defy anyone reading the article to actually calculate their own benefit, even assuming they have full records of their earnings history. Check out this section, which as far as I can tell is entirely accurate, to understand why:

For people with enough earnings to qualify, Social Security then takes the average of their 35 highest years of wage earnings. But it doesn't just take the actual amount of money earned each year, Goss explained. It engages in extensive calculations to equalize the value of wages over time. Given the long-term effect of inflation, for example, $10,000 earned in 1980 is worth a lot more than $10,000 earned in 2009.

The equalization process involves looking at every IRS W-2 and, for self-employment earnings, Form 1099, that is filed by taxpayers each year. I always thought my W-2s were only of interest to the IRS but Goss says those records are actually processed for the IRS by Social Security. "We get all the W-2s and we process them, and we add up all your wages," he says. "We do that for everybody in the country who has wages reported. We look at the total amount of wages and the total number of people reporting wages." Dividing the two numbers produces a national average wage for each year, and tracking the changes of that number over time produces a national average wage index.

Going back to our example of wages earned in 1980, Social Security would look at the ratio of the average national wage in 2009 and the national average wage in 1980 and adjust the value of what you earned in 1980 up to 2009 levels. It then would take the 35 highest annual adjusted earnings years and calculate an average.

Up until people reach the age of 60, this 35-year average is adjusted each year to reflect inflation and changing national wage levels. In the year in which you turn 60, Social Security stops indexing your wages. Here's why. People can elect to begin receiving Social Security benefits as early as the age of 62, Goss explained. There's a two-year lag between when people report wage earnings on their W-2s and when the national wage index is calculated. The 2009 index, for example, is announced in late 2008, and is based on W-2s for 2007 earnings. So, in order for the agency to calculate the benefits of someone reaching the age of 62 in 2009, its latest wage information is based on how much money the person earned through 2007, when they turned 60.

Many people, of course, continue to work after they are 60 years old. Their wages for those years are not adjusted for inflation, and are compared with the wage-adjusted years to determine the top 35 years. This process continues until the year in which a person elects to begin receiving benefits. Once that happens, the 35 highest earnings years are averaged, the result is divided again by 12, and the agency determines a person's average indexed monthly earnings. This is a key figure, Goss said, and "becomes in effect your long-term career earnings level."

This passage – and it's only one part of the benefit formula – underlies my point in "Answer Quickly: How Much Do You Think You'll Get from Social Security?" that the program is just too complicated to serve effectively as the base of retirement income. That base should be something you can easily understand and predict, but the evidence indicates that even people on the verge of retirement have a very hard time predicting their Social Security benefit, even given the national distribution of the Social Security Statement. This complexity also results in people with the same lifetime earnings and contributions to the system getting very different retirement benefits, as I showed in "Will Your Social Insurance Pay Off?"

One problem I have with most potential Social Security reforms is that they make the system more complex rather than less so. Once policy people have mastered the ins and outs of the benefit formula, which takes a while, it seems the temptation to exploit that knowledge by generating even more ins and outs is too much to resist. But they should resist it.

About me

I am a Resident Scholar at the American Enterprise Institute in Washington, where my work focuses on Social Security policy. Previously I held several positions within the Social Security Administration, including Deputy Commissioner for Policy and principal Deputy Commissioner. Prior to that I was a Social Security Analyst at the Cato Institute. In 2005 I worked on Social Security reform at the White House National Economic Council, and in 2001 I was on the staff of the President's Commission to Strengthen Social Security. My Bachelor's degree is from the Queen's University of Belfast, Northern Ireland. I have Master's degrees from Cambridge University and the University of London and a Ph.D. from the London School of Economics and Political Science. I can be contacted at andrew.biggs @ aei.org.